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Portugal government on the brink, markets take fright

Published on 03/07/2013

Portugal's government tottered close to collapse on Wednesday after two ministers quit over its bailout reforms, sparking cries of concern from European authorities as financial markets took fright.

Stock markets and the euro fell and bond yields rose as the crisis fed fears of a new wave of instability from the eurozone’s debt-laden periphery.

Alarm spread after Foreign Minister Paulo Portas resigned on Tuesday evening, a day after the shock departure of Finance Minister Vitor Gaspar.

Portuguese newspapers reported on Wednesday that the agriculture and social security ministers were also likely to quit.

The crisis came at delicate time as Prime Minister Pedro Passo Coelho tries to fulfil the terms of the 2011 bailout that rescued Portugal from financial collapse.

Passos Coelho kept up appearances on Wednesday, heading to Berlin as scheduled for a top-level meeting on youth unemployment.

But European leaders urged the premier to settle the uncertainty as observers speculated that President Anibal Cavaco Silva would call a snap election.

“The political situation should be clarified as soon as possible,” said the European Commission’s Portuguese president, Jose Manuel Barroso, on Wednesday.

Lisbon’s key PSI 20 index of leading shares plunged 5.45 percent in afternoon trade, with leading exchanges elsewhere in Europe sliding too.

Portuguese borrowing prices skyrocketed with the yield on benchmark 10-year Portuguese government bonds spiking above eight percent for the first time since November 2012, before easing a little.

“The initial reaction of the markets shows the obvious risk that the financial credibility recently built up by Portugal could be jeopardised by the current political instability,” said Barroso.

“If this happens it would be especially damaging for the Portuguese people, particularly as there were already preliminary signs of economic recovery,” he added.

In a bid to hold together his conservative coalition, Passos Coelho on Tuesday refused to accept Portas’s resignation.

“I’m not resigning. I’m not abandoning the country,” the premier said.

But analysts warned that the political disarray could bring down his government and derail the country’s recovery under the 78-billion-euro ($100-billion) international bailout it received in 2011.

“Portugal, under severe economic pressure from a lack of growth, a bloated public sector and more than a decade of non-growth, most likely will see its government fall inside the next 48 hours,” Saxo Bank chief economist Steen Jakobsen said on Wednesday morning.

“I see Portugal doing a second bailout inside the next six months,” he wrote.

In his resignation letter, Portas said he disapproved of the prime minister’s choice to replace Gaspar, Treasury Secretary Maria Luis Albuquerque — seen as an indication that Passos Coelho intended to push on with austerity despite protests.

Drastic cuts in spending and tax rises have plunged the country into a deeper recession, with higher unemployment, than had been expected.

Passos Coelho’s government has just two weeks to come up with a programme to reform the state before auditors for the IMF, European Union and European Central Bank arrive on July 15.

“The situation is worrying. So I’m calling on Portugal to take responsibility,” said Jeroen Dijsselbloem, the Dutch minister who heads the Eurogroup of eurozone finance chiefs.

Germany said it was “confident” Portugal would stick to the terms of the bailout, Chancellor Angela Merkel’s spokesman Steffen Seibert told reporters.

President Cavaco Silva was to meet with the prime minister and lawmakers on Thursday in a bid to settle the crisis, his office said.

Analysts warned that if the market tension continued, the country might not be able to return to normal borrowing on the markets next year as hoped.

“The most probable scenario seems to me to be snap elections,” said financial analyst Paula Goncalves.

“The chances of a second bailout are increasing.”